Mortgage lending drops 12% in a month

The total value of home loans granted in September was down by more than £4bn on August to £29.96bn. The fall, revealed by the Council of Mortgage Lenders, was more than double the 5% normally seen at this time of year, traditionally the start of a quieter period in the market.

The figures make clear how the impact of five interest rate rises in the past year has combined with the credit crunch to deter lending.

Many potential buyers simply cannot afford to enter the housing market because their wages have not kept pace with rate rises and higher repayments.

Banks and building societies, meanwhile, have withdrawn 40% of their mortgage deals as they take a tougher line on who they will lend to.

Buyers are being driven out of the market, leading to a fall in sales and lower prices in many areas.

The latest figures will fuel speculation Britain faces a house price slump.

The International Monetary Fund has suggested housing stock is dangerously overvalued, saying as much as 40% of the rise in prices seen in the last decade cannot be justified by economic circumstances.

The Land Registry, the most reliable guide to prices, puts the UK average at £182,914, which is up by 231% or £127,664 in a decade.

Forty per cent of this increase amounts to just over £51,000.

The council, which speaks for banks and building societies, said the fall in home loans in September was 'larger than the norm'.

It added: 'This easing in the market is another sign of the expected consumer response to the five interest rate rises experienced since August 2006.'

Council director general Michael Coogan said: 'We have been expecting a slowdown in monthly lending levels in line with interest rate rises. In the coming months, we expect to see monthly lending levels dip below their 2006 levels for the first time this year as rate effects are exacerbated by the recent liquidity problems in the mortgage market.'

A recent study showed that the average house price is now six times average salary, up from four in 2000.

Prices have only been able to continue increasing because banks and building societies have torn up their rules allowing borrowers to take on huge mortgages.

Customers have been allowed to borrow up to 125% of a property's value, and up to six or seven times their income.

This is less common now, however, in the wake of the credit crunch in the U.S. Banks and building societies are finding it harder to borrow money at favourable terms on international money markets.

Britain also saw a 30% rise in home repossessions in the first half of this year, taking the figure up to 14,000.

Chief UK and European economist at Global Insight, Howard Archer, said: 'Going forward, housing demand seems set to lose significant momentum in the face of the financial market turmoil and the increasing affordability pressure on house buyers.

'Increased affordability pressures are making it increasingly difficult both for first time buyers to get into the housing market and for existing house owners to trade up.'